Selling with Seller Financing? What are note buyers looking for?

Question

What has been your experience selling with seller financing? Are you basically a glorified landlord or has your experience been better? What were the terms of your your loan? Did you sell the loan to a note buyer? What loan terms are note buyers looking for?

I know a lot of questions but your expertise would be appreciated!

Divin Kanyama · Answer

@Joseph Weisenbloom Seller financing can be a good tool, but it helps to think of it less like “being a landlord” and more like becoming the bank. The upside is that you may create steady income, spread out the tax impact, and potentially sell a property to a buyer who may not fit traditional financing. The downside is that you still need to underwrite the buyer carefully, document everything properly, and be prepared for what happens if they stop paying.

A big difference from being a landlord is that you usually are not dealing with repairs, tenants, or day-to-day property issues if the sale is structured correctly. But you do still have risk tied to the buyer’s ability to pay and the property’s value as collateral. So the quality of the buyer, down payment, interest rate, amortization, balloon, and legal documents matter a lot.

In general, stronger terms usually mean a meaningful down payment, a market or above-market interest rate, clear repayment terms, proper insurance requirements, taxes kept current, and a recorded note and deed of trust or mortgage. A balloon can also be useful, but it should be realistic enough that the buyer has a path to refinance or pay it off.

If the plan is to sell the note later, note buyers usually care about things like seasoning, payment history, borrower credit, equity/down payment, interest rate, remaining balance, property type, lien position, and how clean the paperwork is. A seasoned note with a solid payment history and good borrower equity is usually more attractive than a brand-new note with little down.

So overall, it can be better than landlording in the sense that it is more passive, but it is not risk-free passive income. It is more like lending against a property, and the deal needs to be structured with that mindset from the beginning.

Diana Khan · Answer

@Joseph Weisenbloom, one thing I’ve seen with seller-financed deals is that people sometimes think about selling the note only after the documents are already signed. If there is even a chance you may sell the note later, I would think about that from the beginning.

I would want the note, mortgage or deed of trust, insurance requirements, payment terms, default language, and servicing setup to all be clean and consistent. I’d also make sure there is a clear record of every payment and that taxes and insurance stay current. A good deal can become much harder to sell if the paperwork is incomplete or someone has to reconstruct the payment history later. Seller financing can be a great tool, but I’ve found that the exit is much easier when you build the note with that future sale in mind from day one.

Don Konipol · Answer

I won’t duplicate the good information you’ve gotten in the previous two replies. Here’s what I’ll add

• You want either for the interest rate on the note you create to be high enough that the borrower has an incentive to refinance, or you want a shorter term (3 - 5 year) balloon. I also usually place options for the borrower to extend the note if they can’t refi at the time of the balloon payment being due - at a much higher interest rate and or at significant renewal/extension fees.
• If you’re using seller financing to either sell a property where institutional financing is not available, or to obtain a higher sale price, then you need to calculate the value of your note in the note market - because that added to the down payment is your REAL sale price. I’ve purchased a number of properties from sellers with seller financing at 0 % interest fully amortized over 7 - 12 years, because the sellers couldn’t psychologically accept a “loss” and on paper they didn’t have to acknowledge the loss. Interesting more than one of them was then willing to turn around and accept a 40 - 50% “haircut” on selling the note, because accepting a loss on the note was somehow acceptable while accepting a loss on the property was not. Go figure.
• There’s an often overlooked strategy involving owner financing you won’t find in guru posts or workshops, or in any book I’m familiar with. This is to conclude a transaction with a strong buyer who won’t have the funds to close for some time (usually 60 days - 6 months). I’ve done this a few times with one particular rather large operator while he waited for either a refinancing of a property he owned or another property to sell. Worked out great for both of us.

You want either for the interest rate on the note you create to be high enough that the borrower has an incentive to refinance, or you want a shorter term (3 - 5 year) balloon. I also usually place options for the borrower to extend the note if they can’t refi at the time of the balloon payment being due - at a much higher interest rate and or at significant renewal/extension fees.

If you’re using seller financing to either sell a property where institutional financing is not available, or to obtain a higher sale price, then you need to calculate the value of your note in the note market - because that added to the down payment is your REAL sale price. I’ve purchased a number of properties from sellers with seller financing at 0 % interest fully amortized over 7 - 12 years, because the sellers couldn’t psychologically accept a “loss” and on paper they didn’t have to acknowledge the loss. Interesting more than one of them was then willing to turn around and accept a 40 - 50% “haircut” on selling the note, because accepting a loss on the note was somehow acceptable while accepting a loss on the property was not. Go figure.

There’s an often overlooked strategy involving owner financing you won’t find in guru posts or workshops, or in any book I’m familiar with. This is to conclude a transaction with a strong buyer who won’t have the funds to close for some time (usually 60 days - 6 months). I’ve done this a few times with one particular rather large operator while he waited for either a refinancing of a property he owned or another property to sell. Worked out great for both of us.

Ryan Thomson · Answer

Seller financing works best when you go in knowing note buyers will discount your paper, so your terms at origination need to account for that.

Note buyers typically want to see: 10%+ down payment from the buyer, interest rate at or above market (7-9% range currently), a 30-year am with a 5-7 year balloon, and a borrower with documented income and at least a 620 credit score. The stronger those boxes, the closer to par value you can sell the note. Miss a few and you're looking at 75-85 cents on the dollar.

The "glorified landlord" feeling comes from people who didn't underwrite the buyer. If your buyer stops paying, you're into a foreclosure process, not an eviction. That can take 6-12 months depending on your state, and you're paying carrying costs the whole time. So treat buyer qualification the same way a bank would.

The deal I've seen work best: seller has a paid-off or low-balance property, prices it slightly above market to account for the note discount, collects 12-18 months of payments, then sells the seasoned note at a better price than they'd get on day one. Seasoning matters a lot to note buyers.

If you're planning to hold it long-term, the above still applies since you want performing paper. If you're planning to sell at origination, shop 3-4 note buyers before you close so you know exactly what discount you're absorbing going in.

Joseph Weisenbloom · Answer

@Divin Kanyama Wow this is a great answer! Thank you!

Selling with Seller Financing? What are note buyers looking for?

Selling with Seller Financing? What are note buyers looking for?

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